BIA City and Finance Update | October 2018
Autumn started well with the funding window still open. There is further evidence that IPOs in the UK remain a challenge (unlike in the US). Also, in this edition we explore the role of hedge funds and meet Cambridge Innovation Capital.
Corporate Activity and Fundraising
In the last few months, well over £80m was raised for UK life sciences businesses from both secondary listings and private round. The fundings were led by the £35.5m Evox Therapeutics raise. These strong few months follow on from the most recent strong quarterly performance for the UK’s life sciences sectors. The BioIndustry Association/Informa Biotech Financing Update was published at the end of September: it showed strong venture capital fundraising, worth £329.6m between 1 March and 31 May 2018. UK biotech companies continue to attract finance despite some equivocal clinical trial results from a number of later stage trials. As a result, the UK sector is expected to meet or surpass the overall 2017 total of £515m.
Meanwhile, other financial and investing activity continues. The most significant recent deal has been the offer accepted by Sinclair Pharma, valuing the company at £166.6m.
In the US, biotech IPOs continue apace, with healthcare at large representing nearly two of every five IPOs according to a recent fascinating blog post by Bruce Booth, a partner at Atlas Ventures. The blog offers an explanation for why the biotech stock universe is expanding in the USA and against the background of a shrinking number of general companies IPO-ing on US stock markets, and the impact this is having on market capitalisations. Also, it discusses why biotechs IPO in the US, citing, for instance, the lack of late-stage private capital – an issue in the UK too but one that means that companies may end up seeking public capital early in clinical development.
What does this mean for UK Biotech?
The UK’s life sciences sector has long struggled to provide a clear stream of IPOs in the UK. The reasons for this include lack of maturity of the businesses’ clinical pipeline, the lack of availability of late stage capital in the UK pushing companies to go public overseas, relative size, and risk-averse public company investors. Mainly, investors continue to fund privately and in secondary placings as evidenced by levels of monies raised over recent months.
Company experience of public markets should start getting better soon as recent changes to some of the tax efficient financing schemes in the UK, government grant-making groups, as well as new capital coming in to new funders such as Ahren Innovation Capital (which raised over $100m in September) continues to support the UK’s highly innovative sector. These views were echoed across both the BIA’s recent UK Bioscience Forum, and the City investor event, kindly co-hosted by Stifel. While at Monday’s budget the government’s suggestion of further engagement by the British Business Bank to look for ways to improve investment by pension providers into patient capital, should be a welcome boost to longer term UK funding pipelines. Read more here.
Jargon of the month
Hedge funds are pooled alternative investment funds that look to earn an improved active return for their investors through some innovative and, in some case aggressive, financial strategies. Hedge funds don't usually measure their performance against an index or benchmark but focus on trying to deliver a positive return in whatever the circumstances.
Hedge Funds tend to employ unusual strategies such as derivatives and leverage/gearing to aggressively manage the funds under management. (Leverage/gearing involves borrowing money in order to buy or sell shares or other financials instruments.) Many hedge funds may short stocks, i.e. sell shares that they do not yet own, and then hopefully buy the shares so as to deliver the shares to the purchaser at a lower price than that which the hedge fund sold it at.
Most hedge funds have not been as stringently regulated as a traditional investment or pension funds which is why only experienced individuals tend to invest in them. Many hedge fund managers are paid “2 and 20” meaning the fund manager receives 2% of the assets or a fee each year as well as 20% of profits. A point of criticism for hedge funds is that even if performance is poor or negative, there is an asymmetry. The manager will still receive their 2% each year, and that they gain when the fund does well, but losing nothing when they do badly.
Introducing the Investor : Cambridge Innovation Capital
Cambridge Innovation Capital (CIC) combines its relationship with the University of Cambridge with financial and industry links to help build rapidly growing, intellectual property rich companies out of the University of Cambridge and the Cambridge Cluster. It is a preferred investor for the University of Cambridge and has a unique relationship with Cambridge Enterprise, the commercialisation arm of the University.
CIC is predominantly, but not exclusively, focused on building healthcare and technology businesses, and aims to support businesses through to maturity. So far, CIC has raised £125m in funding. It has a dozen healthcare investments including Microbiotica, Bicycle Therapeutics and also CMR Surgical where CIC recently participated in the US$100m Series B funding round.
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This communication should not be regarded as investment research or marketing materials and does not constitute any recommendations to buy or sell shares.